Not long ago, when birthdays, graduations and weddings rolled around, many a gift envelope contained a U.S. savings bond.
Today, bonds are mostly sold electronically, and only from the government (you could previously buy them from banks). And more than just being a grandparent’s go-to gift, savings bonds — like IRAs and CDs — can be a great savings tool.
Just in case you need a quick recap on how savings bonds work: They’re securities sold by the United States to finance government debt and operations. Like CDs, savings bonds have maturity dates: You can redeem them when they’re 12-months-old, at which point you’ll receive back your purchase price plus accrued interest, according to the U.S. Treasury.
There are two types of savings bonds sold today, explains the U.S. Department of the Treasury:
Series EE:Until recently, the bond’s value was guaranteed to double in 20 years over the amount you paid (i.e., a $1,000 EE savings bond would cost you $500 at purchase and net you $1,000 at maturity). Now, though, EE bonds earn a fixed rate of return.
Series I: This bond is issued with two interest rates: a fixed rate from the treasury that lasts through the life of the bond on top of a variable interest rate (to adjust for inflation), determined twice a year by the Consumer Price Index.
Adding savings bonds to your retirement planning can give you certain advantages:
Savings bonds are backed by the U.S. government. In the same way you can feel at ease opening an FDIC-insured bank account, you can feel safe buying a U.S. savings bond.
You’ll save on taxes
No state or local taxes are charged on interest earned on savings bonds. Plus, federal taxes are deferred until you cash in your bond at maturity.
You can increase your annual retirement contribution
While your allowable IRA contribution in 2012 tops out at $5,000 ($6,000 for those 50 and older), buying savings bonds for your retirement fund allows you to chip in considerably more, notes IRA.com. You can currently purchase up to $10,000 worth of EE bonds and up to $10,000 worth of I bonds — bringing your contribution total all the way up to $20,000, explains Forbes.
You’ll pay no commissions
You can cash in a bond after five years
While you usually have to pay a penalty if you withdraw funds from a traditional IRA or 401(k) before age 59 ½, you can cash in a savings bond penalty-free five years after purchase.
What would make you consider including savings bonds in your retirement savings plan? What is your savings bond strategy?